Give states option to file for bankruptcy

January 31, 2011

Freedom New Mexico

With persistent deficits, soaring pension obligations and mounting bond debts, states like California could well benefit from the ability to restructure their finances through a bankruptcy procedure. Bankruptcy allows the debtor to work through an orderly and equitable settlement of obligations.

The idea has been gaining traction, with support from former House Speaker and newly announced presidential candidate Newt Gingrich and other scholars, such as David Skeel, a University of Pennsylvania Law School professor and author of “Debt’s Dominion: A History of Bankruptcy Law in America.”

There is no provision in federal bankruptcy law that allows for states to file. If this were changed, states could file bankruptcy, restructure debt and essentially limit some current obligations. It would also give states much more leverage during collective bargaining negotiations with employee unions and help provide a last resort for states so the federal government would not be inclined or obligated to consider state bailouts.

Not everyone is convinced, however. A Los Angeles Times editorial Tuesday said that state officials already “have the tools they need” to put their fiscal houses in order. The remedy: “painful spending cuts and unwelcome tax increases.” But those approaches haven’t faired well in recent years, and even so, fail to address current realties. The Times suggests an adequate fix would result from requiring current workers to contribute a larger share to their pensions and changing pensions offered new hires.

We’re not so sure. Less-generous retirement benefits help (but only slightly, depending on the details) lower the costs of future employees, and pension obligations to current employees are so high that nothing short of having employees paying 50 percent of their retirement costs will have an impact, pension experts tell us.

Faced with today’s budget realities, states need more tools to allow them to be flexible and that will help lower costs in the short term as well as down the road. The ability to file bankruptcy could be such a tool.